Revenue bond rating withdrawn after California hospital district's default

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SAN DIEGO, Calif. — Fitch Ratings has withdrawn its rating on $13.65 million in revenue bonds issued by bankrupt Tulare Health Care District after it defaulted on its Nov. 1 bond payment.

The rating agency downgraded the revenue bond ratings to D from C before withdrawing the rating.

“We have now withdrawn the rating on the district, so we are no longer following it from a credit perspective,” said Fitch Director Rebecca Meyer. “If there is a reapplication for the rating, we would look at it at that time.”

The action does not apply to $84.1 million in general obligation debt, rated only by Moody's Investors Service, which assigns a speculative-grade Ba3 rating.

Tulare Regional Medical Center’s board decided last week to close the hospital as of midnight Sunday, but the downgrade on the was tied to whether the Nov. 1 revenue bond payment would be made, Meyer and Director Olga Beck said in a Friday interview.

The district’s board closed the Central Valley hospital Sunday after giving notice Oct. 28 that it was voluntarily suspending its license with the state of California to operate the 112-bed hospital, clinics and other outpatient facilities, according to the Fresno Bee.

The Central Valley hospital district filed for Chapter 9 bankruptcy on Sept. 30 in the Eastern District of California bankruptcy court. Fitch had already downgraded the revenue bonds below investment grade Aug. 8 to a B rating and put the district and its bonds on negative watch.

Healthcare Conglomerate Associates, an outside contractor hired to run the hospital, has been in disputes with the board over the past 12 months.

A federal judge ruled last Wednesday that the hospital could sever its contract with HCA and find a new operator. The judge set Nov. 27 for the transition, but the board’s attorneys told the Bee that the company was not willing to work with the board and the decision to temporarily suspend the license was a step to avoid the state issuing sanctions and closing the hospital.

The board chose to the $347,672.50 interest payment on the bonds, but not make the $580,000 principal payment, according to a Nov. 1 filing posted on the Municipal Securities Rulemaking Board’s EMMA website.

The successor indenture trustee, Wilmington Trust, National Association, did not make the principal payment, throwing the bonds into default, according to the filing. The bond reserve account had a value of $1.4 million as of Nov. 1 -- enough to cover both principal and interest payments due Wednesday.

The notice to bondholders indicated that the district has announced a temporary suspension of its business as part of ongoing efforts by the district to separate from its existing management services provider.

In an Oct. 6 report, Fitch said the voluntary bankruptcy petition included findings that Tulare “will be unable to pay its obligations within the next 60 days and that TRMC has zero cash in its bank accounts.”

The issuer rating was downgraded to C after the bankruptcy filing, which indicates the likelihood of default, Meyer said. But given that the reserve fund had sufficient dollars to cover the debt service for the November payment, there was not a downgrade to the default security rating for the bonds, Meyer said.

“So, we had been waiting and watching for the Nov. 1 principal and interest payment date,” Beck said. “When the announcement came out that the principal payment had not been made, the non-payment drove the downgrade and rating withdrawal."

According to Moody's, the taxes backing the district's GO bonds are collected by Tulare County and disbursed directly to trustee without passing through the health care district. GO bond payments are due on Aug. 1 and Feb. 1, according to Moody's.

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Bankruptcy Healthcare industry Speculative grade bonds Revenue bonds California